Can company promoters avoid their statutory liability under failed pre-incorporation contracts?

Authors:

E Olivier, S Hull and A Williams
 

Summary:

Section 21 of the Companies Act 71 of 2008 (the Act) allows a person (a promoter) to conclude a contract on behalf of a company that does not exist. Section 21(2) of the Act imposes personal liability on the promoter through a statutory warranty. The promoter is liable for the obligations arising from the pre-incorporation contract in the event that the company is never incorporated, or if it rejects the contract upon incorporation. However, it is unclear whether the Act allows for a promoter to contract out of his or her liability imposed by s21(2) of the Act, as the section does not expressly address the issue. This article purposively interprets relevant sections of the Act and discusses the enforceability of exemption clauses to determine the correct interpretation of s21(2). The article points out that the flexible nature of the public policy standard creates further uncertainty as to whether a contractual exemption clause will be valid or not. However, the validity of a contractual clause excluding statutory liability will depend on the wording of the relevant statute and on the unique content and circumstances of the particular exemption clause. In respect of exemptions to a promoter’s liability under s21(2) of the Act, the article contends that the anti-avoidance provision in s6(1) of the Act, is not applicable to such clauses. After considering the purpose and context of the section, the article argues that s 21(2) should be interpreted to allow for an exemption to the promoter’s liability. In the interests of legal certainty, the article concludes by recommending legislative amendment that includes, for example, a provision that explicitly permits the promoter to contract out of his liability.


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